Continuing the run of recent strength, April natural gas futures cruised to a high of $7.715 during Wednesday's regular session before expiring at $7.558, up 5.5 cents. With the April contract now being spoken about in the past tense, focus turns to May, which gained 5.7 cents to close at $7.672.
Despite comfortable storage levels and real winter temperatures mostly in the rearview mirror, some within the industry said the market is being propped up by a number of things, including sympathy with petroleum strength, bullish hurricane forecasts and slightly below normal temperatures in the near term. In addition, some mentioned that the market is seeking out higher prices simply because it has failed at getting lower.
"The push higher in natural gas in my opinion is opportunistic," said Tim Evans, an analyst with Citigroup in New York. "The comparison to the heating oil price is supportive and the near-term weather picture also looks to be supportive. I also think we had exhausted attempts down near $6.800 to get lower. If you can't break the floor, test the ceiling. However, I really have to wonder if the market can sustain a higher price level. If people are loading up on the long side in anticipation of the hurricane season, they are going to have a long wait for the real hurricane activity to appear in August. Even till the first of June with the official start to the Atlantic hurricane season is a long time to sit with a long position if you are a speculator."
Commenting on Tuesday afternoon's Globex rally in crude and natural gas futures (see Daily GPI, March 28), which was sparked by erroneous rumors of an attack on a U.S. warship by Iran's navy, Evans told NGI he was not surprised by the reaction, but that he was surprised that we haven't had more scares like it.
"It was a good time to already have a long position on because it did not turn your stomach upside down," he said. "When you think of what is going on over in the Middle East, I am surprised that this was the first rumor of that type. The risks of something like that actually happening are significant."
Evans said that while crude's significant gains are helping the rise of natural gas futures to a degree, it also appears that hunting season for bears has opened. "The market is looking for an excuse to do a little bear baiting. That is at least part of the current exercise," he said. "However, it is convenient that temperatures are going to be a little cooler over the next few weeks and it is useful having some hurricane season forecasts being released. It is important to remember that hurricane forecasts are not cumulative. If we get three forecasts for 15 named storms apiece, that does not mean there will be 45 named storms this season. It does seem like we will see another headline for a new hurricane forecast and the price will go up another 10 cents. The problem is the forecasts are not saying anything different."
As an example, Evans highlighted Weather 2000's hurricane forecast released Wednesday. "In their hurricane forecast they did not actually forecast the number of hurricanes," Evans said. "What they did was issue a forecast for what they think the Colorado State University hurricane team will forecast. In addition, Weather 2000's forecast is that Colorado State will pick 14 named storms, which happens to be unchanged from Colorado State's December forecast, so nothing has really changed. Despite that fact, futures pushed higher Wednesday."
The Weather 2000 forecast follows the one put out by AccuWeather.com meteorologist Joe Bastardi on Tuesday (see Daily GPI, March 28). He said the U.S. Gulf Coast is at much higher risk of destructive tropical weather than last year and that "the Gulf and Florida face a renewed threat, and we will see more powerful storms across the board. We will not get anywhere near the amount of storms that we did in 2005, but it is the intensity of the storms we do get that will be of major concern."
Despite international tensions and the potential for an active storm season looming, the bearish case finds few adherents. "We see a lot of risk to lower natural gas prices, and if you take some of the fluff out of the petroleum complex and May crude oil trades down to $56 or $55, natural gas will be down to $6 to $6.50 pretty quickly," said a Denver gas marketer. He added that his company was short natural gas in light of the current supply situation.
Looking at Thursday morning's storage report for the week ended March 23, Evans said he expected a 10 Bcf withdrawal, which would continue adding to the surplus over the five-year average for this time of year. The number revealed Thursday morning will be compared to last year's 92 Bcf withdrawal and the five-year average pull of 50 Bcf.
Despite the expected addition to the year-over-five-year-average surplus, Evans said he wouldn't expect any real bearish response. "The market last week clearly established that it could absorb a very bearish storage support and rally anyway," he said. "It doesn't seem to care if the year-over-five-year-average storage surplus goes up significantly."
A Reuters survey of 21 industry players was expecting storage supplies to drop by approximately 16 Bcf, while the ICAP storage options auction Wednesday afternoon revealed a consensus expectation of an 18 Bcf withdrawal
Golden, CO-based Bentek Energy's Flow Model indicated that the storage withdrawal season has returned for one more week with a withdrawal of 17 Bcf, bringing stocks 11.8% below the five-year high (last year) and 21.9% above the five-year average. Bentek expects the East region to see a 36 Bcf withdrawal while the Producing region and the West region inject 10 Bcf and 9 Bcf, respectively. "Unless unusual weather develops, this is expected to be the last withdrawal for the winter season," the data analysis firm said.
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